This article first appeared in The Edge Malaysia Weekly on June 19, 2017 - June 25, 2017

THERE is “renewed optimism” in the investment banking market, says Tan Ai Chin, senior banker, conglomerates and GLC, at OCBC Bank (M) Bhd.

“Deal flow has increased and that is a good sign. This is primarily driven by the fact that foreign investors are coming back to the market — they are looking at emerging markets to enhance their returns. An important driver lies in the signs of sustained local domestic growth. All these factors have brought back investor confidence to the market as well,” says Tan, who is also head of investment banking.

She believes the catalyst for growth lies in addressing the basic fundamentals of an open financial system to facilitate and encourage foreign investment and participation in both the bond and equity markets. The sustainability of the current momentum moving forward will depend on whether Malaysia can ensure there is an open and transparent financial system for the market.

“Underlying this is to ensure we have a consistent foreign currency policy and at the same time, it has to be complemented by stability in the political landscape. That would be key to ensuring investor confidence comes back to the market. Malaysia has a lot to offer, both on the equity and bond market fronts. If you look at the trend now, it looks like we have — from being one of the worst performers in terms of the performance of our currency — moved up the curve to become the sixth top performer in Asia today. There is a strong feel-good factor as a whole in the market,” Tan says.

“However, we remain cautious about the sustainability of this interest against the backdrop of global economic uncertainties, geopolitical tension and the looming election,” she cautions.

In terms of syndicated loans in the market, Tan says the volume is currently at US$2.2 billion compared with US$4.5 billion in the corresponding period last year. Of the US$2.2 billion in loans, 70% is in foreign currency and 30% in ringgit.

She notes that there is continuing demand for foreign currency loans from local corporates, government-linked companies and pension funds to facilitate overseas investments to diversify their base.

“We have also seen several local banks raising funds in foreign currency after being absent from the market earlier, evidently to support the foreign currency requirements of their clients,” she adds.

On the corporate finance front, Tan expects 2017 to see more initial public offerings than 2016 when there were a mere 11 listings that raised just RM1.13 billion.

“To date, there are eight planned listings with an offer size totalling RM3.6 billion. On top of that, we also expect to see more M&A activities in 2017, with RM7.1 billion already registered to date.” This was after an upward trend in deal activities in 2016 that saw transactions worth RM22.1 billion, Tan says.

Corporate bonds issuances came up to RM14.4 billion up to May 2017 against RM20.9 billion in the corresponding period last year, driven primarily by the financial services sector — which took up 48% — as they moved to shore up their capital and liquidity bases. Total corporate bonds and sukuk issuances are expected to hit RM75 billion to RM85 billion in 2017, according to RAM’s projections, she says.

On foreign investors, Tan says there has been a shift in sentiment as foreign shareholding rose to 25.6% as at April 2017, from 22.4% in May 2016.

As for the bond market, she says the tide has turned with the return of foreign investors in April.

“However, foreign holdings of bonds have still not increased to the 18.5% level seen in December 2016 — it is currently hovering at around 15.2%. We see positive trends of interest, especially from real money managers in the Malaysian Government Securities space and it has driven yields down by an average of 25bp since the end of last year.”

Despite these positive developments, the seasoned banker warns that Malaysia’s capital market is still exposed to downside risks because of the uncertainties surrounding the US Fed’s monetary policy strategy, commodity prices and other factors.

Nevertheless, citing a McKinsey research report, Tan points out that Asia now offers the most attractive corporate and investment banking market, contributing up to 43% of the global market for the segment.

“The catalyst for growth is the rapidly growing mid-corporate segment that will fuel the growth of investment banking activities beyond just the public sector and conglomerates, which are all typically overly well-banked,” she says.

OCBC Malaysia is one of the oldest foreign banks in the country. The Singapore-based financial group was formed in 1932 from the merger of three local banks — the oldest of which was founded in 1912 — and has had a presence in the country since then.

Year to date, OCBC Malaysia is the top mandated lead arranger for syndicated loans with a total of US$398.60 million, and was also No 1 last year, with US$1.69 billion, according to Bloomberg.

It also won the Asset Triple A Country Award 2016 Best Loan House for Malaysia and Best Syndicated Loan for Myanmar and the ABF Wholesale Banking Awards 2016 — Malaysia International Project Finance Bank of the Year 2016.

Cyclical or structural?

While there may be signs of improved optimism, it is no secret that the boom in investment banking is over. There has been a notable slowdown in the industry in recent years, and many foreign banks cut investment banking jobs in Asia last year as deal activity dwindled.

Is the current tougher operating landscape cyclical or a structural issue?

Investment banking is undeniably a cyclical industry, Tan admits.

“It is a feast and famine business — one moment, you are getting a feast and the next, you don’t get anything to eat at all. Essentially, the business opportunities will depend on the activities in the market. It is the activities in the market that will fuel deal flow, whether it is on the equity or bond side. The bulk of investment banking revenues come from debt and equity placements as well as M&A activities. M&A is the most profitable segment, but also the first to be cut during the first sign of trouble, so that is the challenging part,” she says.

“However, the challenges facing the industry are structural in nature as well, especially with the increasingly commoditised nature of the product offering and increased price transparency, which invariably result in stiff competition and thus, fee compression.”

A more important factor is the increasing regulation, she adds. “All these impact the ability of banks to generate sufficient return and therefore, ensure a sustainable business model. I think that is the challenge for the market as a whole.”

Global investment banks are already at a critical point in charting their journey for the future and Tan believes they have to make that paradigm shift and look at what kind of transformation they need to create the right business model that can survive the test of time.

“In my view, a sustainable business model will really be achieved by banks that prioritise and complete the transformation from a collection of product-based businesses to an integrated customer-centric model that looks at addressing the customer’s needs holistically. In my view, banks’ ability to innovate and differentiate themselves will help to enhance client stickiness. That is where you can optimise return,” she says, adding that investment banking will continue to remain relevant and critical to ensure the optimal functioning of a healthy financial system to drive economic activities.

The challenge for investment banks, Tan believes, is to keep pace, simplify to cut costs, improve their internal infrastructure and serve clients better.

“While the size of balance sheets is important, efficiency and cost of delivery will be equally critical. In addition, while the industry’s foundation has always been premised on a risk-and-reward mindset, it must now evolve to one that is anchored on stability and commitment. The clients are now more focused on looking at how the investment banks can serve them across all requirements on a consistent basis rather than purely be happy with a transactional relationship,” she sums up.

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